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Apr 30, 2012, 08.55 PM IST
It is 100% true that building wealth takes discipline and planning. But, we are not going to bore you by repeating well known truths about long term investing and SIPs.
It is 100% true that building wealth takes discipline and planning. But, we are not going to bore you by repeating well known truths about long term investing and SIPs. You already know this. Rest assured that we at PersonalFN know exactly how hard you are working to build your wealth, and would like to give you a few tips that will make things much easier on the way.
Let’s get started:
1) Work Hard. Invest Smart: It’s often the small, smart things that matter, over 10 or 15 or 20 years. For example, where does your monthly salary get saved? In your savings account, or in a Sweep In Flexi Deposit offered by your bank?
When you get your pay check each month, put it into a sweep in flexi deposit with your bank. The flexi deposit will earn you the rate of return of a 1 year FD, and give you the liquidity of a savings account.
Suppose you earn 50,000 per month. You can immediately put the entire corpus into a Sweep In Flexi Deposit (your bank will ask you to fill and sign a form). If your bank is offering 7% on a 1 year FD, your Flexi Deposit will also earn you 7%, for as long as the money is invested.
Due to its liquid nature, you can draw funds from the Flexi Deposit, make your investments from it, and use the money as and when you need it, with no worry of illiquidity of funds. This is a much better option than a straightforward Savings Account and an easy way to get a higher rate of return than your savings account.
2) Don’t Overspend on Insurance- Ask the Agent the Questions That Matter: We all receive calls from Insurance companies where the agent on the other end of the line is selling the best policy, with guaranteed returns, practically ensuring that you will be very wealthy in 10 or 15 years. But remember, mis-selling is rampant, and agents will certainly speak half truths, not giving you all the facts, so that they can sell the policy and earn the commission.
That’s not all; insurance companies will name policies such that you believe it is a particular type of policy when actually it is a different type completely. For example, a renowned insurance company has named one of its ULIP policies “XYZ Endowment Plus”. The policy in question is not an endowment plan at all; it is a ULIP Plan with all the charges, commissions and risk of a ULIP. For more information, read our article titled Is Your Endowment Policy a Waste of Your Money?
To sum, where insurance is concerned, take a simple term plan, and a good health plan and critical illness policy (if you need it). Don’t get lured in by unscrupulous agents who will sell you anything to make themselves a quick buck. Also, ask your agents to disclose the commission not just in percentage terms, but in rupees. It’ll give you the real picture of what you are contributing to your agent’s lifestyle.
3) Have a Plan: It’s a well known fact that people who plan ahead, tend to have smoother journeys. The same goes for your financial life. If you will put thought, effort and time into planning your foreign vacation next year, shouldn’t you put much more thought, time and effort into planning for things such as your child’s education and your own retirement?
Your Financial Plan will help you see where you stand today, where you need to reach, and what steps you need to take to get there as safely and quickly as possible. It will help you maintain perspective in times of market turbulence, and not get carried away with market highs.
4) Delay Gratification: Spending more today, means saving less today. Saving less today means investing less today. By doing this you are losing out on a lot of money in the future.
Some quick examples:
If you usually spend 35,000 per month on yourself, and one month you spend 45,000 because you wanted to buy a more expensive watch, i.e. you invest 10,000 less than usual, then in 20 years, this reduction of 10,000 will have reduced your wealth by approximately 1.63 lakhs.
5) Don’t be scared of taking a loan (for assets that will appreciate with time): You can take a loan, if you need it, to the amount that you can easily service. Maintain a Debt to Income ratio of not more than 30% (i.e if you earn 1000 per month, not more than 300 should be spent servicing your loans), and be sure to make your payments on time. If you want to build / buy a home (an appreciating asset), and you don’t have the funds to do so in one shot, you can opt for a home loan, and make payments over the years. But remember, don’t continuously prepay, you could be losing out on opportunity returns of your money. For more information, read our article titled Home Loan Dilemma: To Prepay or not to Prepay.
6) Track your Wealth: Are you curious about exactly how much wealth you have and where it is? And how much you are spending and on what? Apart from satisfying your curiosity, tracking your wealth i.e. your cash flows, your assets and liabilities, is an excellent way to measure how much progress you are making year on year, and of seeing where you can cut back on expenses to increase investments. We are happy to offer you our Wealth Tracker, which will help you do just that.
In Summary: There are a number of safe and smart ways to build your wealth, beat inflation, provide for your family and get rich over time. Start with the 6 points listed above, as these are the ones that will contribute the most to building your wealth and helping you to achieve the lifestyle of your dreams.
PersonalFN is a personal finance website
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